Banking system liquidity in surplus mode but call rates are on the rise

Care Ratings Ltd noted that the spike in overnight rates accompany higher borrowing in the market
Overnight call money rates are on the rise even as the banking system liquidity remains in a surplus mode.

The rise in overnight call rates is independent of rising bond yields in the 10-year segment. Overnight rates fluctuate based on liquidity available in the system. The Reserve Bank of India (RBI) tries to keep liquidity sufficient enough so that the weighted average call rates are anchored around the policy repo rate, presently at 6.50 per cent.

The problem, though, is that the liquidity is skewed. Some big banks, with good deposit base, possess higher liquidity, whereas the smaller banks are largely borrowers in the system. If the larger banks don’t lend at the policy rates, smaller banks have to pay up.

The overnight call rates closed at 6.63 per cent. In the intraday trade, the rates had climbed up to 6.75 per cent.

Care Ratings Ltd noted that the spike in overnight rates accompany higher borrowing in the market.

“The call money rate rose by 11 bps vis-à-vis the previous week close on account of higher borrowings in the call money market,” a Care Ratings report said.

According to the ratings agency, the average daily borrowings in the call money market during the week ended September 7 was higher by 28 per cent at Rs 15.63 billion from the average borrowings of Rs 12.22 billion in the previous week. The spike in borrowing could be explained by the possibility of liquidity turning tight ahead of advance tax outflow, which has started.

"The call rates are rising in anticipation of a possible liquidity deficit before advance tax outflow. This week being reporting Friday week, banks were covering their reserve requirement. The liquidity can turn negative towards weekend," said Hemal Doshi, vice-president of SBI DFHI Ltd.

Banks are mandated to keep 4 per cent of their deposit base in cash. Technically banks can carry on with lower liquidity, but every fortnight on reporting Fridays they have to show that they have complied with the required cash reserve ratio (CRR). Borrowing spikes at the end of the week to make sure the banks have maintained this CRR.

Besides, bond dealers say that the recent defaults by IL&FS group companies and delay in payments in commercial papers (CP) have hit money market sentiments, which is making some banks a bit risk averse.